A PRIMER ON DIGITAL TOKENS IN THE WORLD OF CRYPTOCURRENCIES

The advent of Blockchain technology has set a new trend in countries which have fully adopted them and is slowly mesmerizing the markets in countries which have been slow to adopt.

A few developing countries which foresaw trouble with Blockchain are now realizing the potency of this technology and actively engaging its citizens to contribute to this community.

A famous comedian has said “Blockchain is gold for nerds”, but it is proving profitable not only for nerds but also to laymen who put in a little time and effort to learn and effectively leverage it.

Blockchain is currently the only available technology that securely supports ‘peer-to-peer’ transactions. This is the backbone of decentralized applications.

With decentralized applications, transactions are often faster and work out more economically without the need of a middleman. Also, Blockchain is completely transparent with no scope of a fraudulent transaction since the universal ledger is stored across all computers.

This article provides an overview of a terminology called ‘Digital Tokens’, which is often used in the realm of cryptocurrencies. The reader will be able to appreciate the different types of digital tokens that exist and consider investing in them.

Some market trends that are currently running are leveraging digital tokens to raise millions of dollars as part of Initial Coin Offerings(ICOs). Some services like games and other online facilities are advertising digital tokens as the preferred modes of payment towards in-app purchases.

With the advent of mobile technology and the presence of an always-connected facility, digital tokens are bound to take over the market and also help corporates analyze this big data to infer trends and patterns.

Coin vs Tokens

Cryptocurrencies like Bitcoin and other Altcoins have a monetary value and can often be used to purchase goods and services. They are the current medium of transfer between parties recorded as transactions and added as a block to the Blockchain.

Tokens often called crypto-tokens or digital tokens differ from coins in the way that they are hosted as a supplement to the current Blockchain and cannot be directly utilized for purchasing goods and services.

Digital tokens have a monetary value but are often in the form of investments. Digital Tokens are often introduced with ICOs(Initial Coin Offerings) but can also function if one person transfers the authority of their digital token to another individual.

Digital Token Taxonomy

A token can be broadly classified into five categories based on their course of action – security/equity, currency/medium of exchange, commodity, utility and hybrid.

Since security and utility tokens are the most widely used kinds of digital tokens, this article will further explain these and enable you to make a wise choice.

Security tokens: are synonymous to an investment contract. Security tokens could be shares of a company or an entitlement to dividends or interest payments. In terms of economic function, they are analogous to equities, bonds or derivatives.

Utility tokens: Utility tokens are similar to the tokens that would be bought at a store, as utility tokens provide access to a company’s product or service. They aren’t regulated and are not investments.

Digital tokens are rapidly taking over as the mode of payment in the domain of e-commerce. Since digital tokens are issued by authentic sources, they are well reputed as being trusted modes of payment.

In the previous section, there was an overview on the different types of digital tokens and these tokens(utility or hybrid for instance) pave a way to let customers execute secure transactions to purchase goods and services.

Pragmatic use cases of Digital Tokens

The five most pragmatic and current use of digital tokens are:

Digital currencies: Digital currencies are similar to normal currency but exist in digital or virtual form. They have the advantage of being in the base cryptocurrency system, they enjoy ‘peer-to-peer’ transaction without an intermediary and can avail seamless transfer of ownership.

Equity, utility tokens and ICOs: Equity tokens empower the user of a company asset like debt or stock whereas utility tokens are more oriented towards purchasing of commonplace goods and services. Initial Coin Offerings are often used to fund projects and also as a medium to distribute equity and utility tokens to ICO participants.

Digital objects: In order to make the experience of e-commerce more enticing, digital tokens have taken the avatar of digital objects wherein users are attracted to mascots and characters and also to fun giveaways like entry tickets or discount coupons.

Verifiable voting: The voting paradigm of ‘Yes-No’ system can be digitized with participants voting their favor and the consensus being verified later and choosing a winner. This system can also be extended to more features and later processed with analytics.

Access tokens: Access tokens are a provision to validate the capacity of a user based on their current balance of cryptocurrency to access a privilege like online gaming, streams, blogs and forums. This facility restricts users from entering ‘members-only’ sections.

A few more insights on Digital Tokens

Digital tokens no doubt promise great versatility. Individuals who become conversant with the ‘nitty-gritty’ of digital tokens can harness its power to great advantages.

However, there are regulatory bodies in each country that define rules as to how digital tokens should operate. Since this model has not yet been fully integrated into all retail systems in each country, users have to be wary to avoid being cheated.

Since the system is also relatively complex, users should have a good fundamental knowledge of Blockchain, cryptocurrency, internet banking and e-commerce before venturing to invest or availing of facilities.

There is no doubt in time to come digital tokens will be fully percolated into all financial systems, but considering the complexity of the system and the required highly skilled engineers who can materialise them, there is still a long way to go.